This runs counter to claims some in the health care industry have made in favor of mergers. By harnessing economies of scale and scope, they’ve argued, larger organizations can offer better care at lower costs.

In one recent example, two Texas health systems — Baylor Scott & White, and Memorial Hermann Health System — sought to merge, forming a 68-hospital system. The systems have since abandoned the plan, but not before Jim Hinton, Baylor Scott & White’s chief executive, told The Wall Street Journal that “the end, the more important end, is to improve care.”

Yet Martin Gaynor, a Carnegie Mellon University economist who been an author of several reviews exploring the consequences of hospital consolidation, said that “evidence from three decades of hospital mergers does not support the claim that consolidation improves quality.” This is especially true when government constrains prices, as is the case for Medicare in the United States and Britain’s National Health Service.

“When prices are set by the government, hospitals don’t compete on price; they compete on quality,” Mr. Gaynor said. But this doesn’t happen in markets that are highly consolidated.

In 2006, the National Health Service introduced a policy that increased competition among hospitals. When recommending hospital care, it required general practitioners to provide patients with five options, as well as quality data for each. Because hospital payments are fixed by the government — whichever hospital a patient chooses gets the payment for care provided to that patient — hospitals ended up competing on quality.

Mr. Gaynor was an author of a study showing that consequences of this policy included shorter hospital stays and lower mortality. According to the study, for every decrease of 10 percentage points in hospital market concentration, 30-day mortality for heart attacks fell nearly 3 percent.

Another study found that hospital competition in the N.H.S. decreased heart attack mortality, and several studies of Medicare also found that hospital competition results in lower rates of mortality from heart attacks and pneumonia.

Another piece of evidence in the competition-quality connection comes from other types of health care providers, including doctors. Recently, investigators from the Federal Trade Commission examined what happens when cardiologists team up into larger groups. The study, published in Health Services Research, focused on the health care outcomes of about two million Medicare beneficiaries who had been treated for hypertension, for a cardiac ailment or for a heart attack from 2005 to 2012.

The study found that when cardiology markets are more concentrated, these kinds of patients are more likely to have heart attacks, visit the emergency department, be readmitted to the hospital or die. These effects of market concentration are large.

To illustrate, consider a cardiology market with five practices in which one becomes more dominant — going from just below a 40 percent market share to a 60 percent market share (with the rest of the market split equally across the other four practices). The study found that the chance of having a heart attack would go up 5 to 7 percent as the largest cardiology practice became more dominant. The chance of visiting the emergency department, being readmitted to the hospital or dying would go up similarly.

The study also found that greater market concentration led to higher spending. And a different study of family doctors in England found that quality and patient satisfaction increased with competition.

For many goods and services, Americans are comfortable with the idea that competition leads to lower prices and better quality. But we often think of health care as different — that it somehow shouldn’t be “market based.”

What the research shows, though, is that there are lots of ways markets can function, with more or less government involvement. Even when the government is highly involved, as is the case with the British National Health Serviceor American Medicare, competition is a valuable tool that can drive health care toward greater value.

The newly merged, $29 billion system will have a footprint in 21 states, with more than 700 care sites and 142 hospitals, and an extensive social services and population health network.

KEY TAKEAWAYS

CHI CEO Kevin E. Lofton and Dignity Health President and CEO Lloyd H. Dean ‘are each a CEO in the Office of the CEO’ for the new health system, which will be based in Chicago.

CommonSpirit Health pledges to focus on underserved communities, population health, and social determinants of health.

Dignity Health and Catholic Health Initiatives on Friday finalized the megamerger of the two Catholic health systems that will now be known as CommonSpirit Health.

The newly merged, $29 billion system will have a footprint in 21 states, with more than 700 care sites and 142 hospitals, along with research programs, virtual care services, home health programs, and population health initiatives to tackle the root causes of poor health.

CHI CEO Kevin E. Lofton and Dignity Health President and CEO Lloyd H. Dean are “each a CEO in the Office of the CEO” for the new health system, which will be based in Chicago.

“We didn’t combine our ministries to get bigger, we came together to provide better care for more people,” Dean said in a media release.

“We created CommonSpirit Health because in order to solve national health challenges, we need the breadth, scope, and resources to make a nationwide impact,” Dean said.

Lofton said CommonSpirit Health “will bring the expertise of a national health system to neighborhoods across the country.”

“Whether it’s a neurological institute in Arizona, a 25-bed critical access facility in North Dakota, a mobile lung cancer screening program in Tennessee, or a ‘hospital at home’ in Nebraska, CommonSpirit Health will expand the best approaches from across our new organization,” Lofton said. “Our whole will be much greater than the sum of our parts.”

The new health system has 150,000 employees and 25,000 physicians and advanced practice clinicians.

Dean noted that 27 million Americans remain uninsured, and life expectancy continues to fall, despite some progress made under the Affordable Care Act. He said CommonSpirit will focus on underserved populations and the social causes of poor health.

“Too many people still can’t access quality healthcare in their communities,” Dean says. “America’s healthcare system need big changes, and we have a big goal of improving the health of millions of people in this country.”

Lofton said CommonSpirit “will focus on treating the whole person, particularly the social causes of poor health that lead to needless suffering, unnecessary hospital visits, and premature deaths.”

“Our goal is to be the leader in every type of care, whether you need brain surgery, urgent care for the flu, or help managing your diabetes,” he said.

CHI and Dignity Health previously announced that the new ministry will retain the names of local facilities and services in the communities where they are located.

‘GAINING ECONOMIES OF SCALE’

Brad Haller, director in West Monroe Partners’ Mergers & Acquisitions practice, notes that “so far, the new entity has shown very little change to how they will actually deliver care.”

“While the organization has a name for the merged entity, CommonSpirit, both systems indicated they are going to continue operating under both the CHI and Dignity names in their local markets,” he says.

“The merger wasn’t about branding or changing the nature of its business, but rather gaining economies of scale and geographic footprint, which makes sense for the like-mindedness in the way they deliver care and manage operations,” he says.

Concerns had been raised during the merger talks that women’s healthcare services would be ill-affected under the consolidated health system. Haller says those concerns appear to have been addressed with California approved the merger with a stipulation that CommonSpirit “must maintain emergency services and women’s healthcare services for 10 years after the deal closes.

“(California) also required CommonSpirit to create a Homeless Health Initiative to support hospitalized homeless patients,” Haller says. “I would suspect that the newly merged organization will find more synergies in care delivery as time goes on, as most merged organizations find during the post-integration phase, but in the spirit of efficiency or expansion.”

“The merger wasn’t about branding or changing the nature of its business, but rather gaining economies of scale and geographic footprint, which makes sense for the like-mindedness in the way they deliver care and manage operations.”

—Brad Haller

Allan Baumgarten, a veteran observer of the hospital sector in Midwestern states, says several Dignity hospitals are considered “non-Catholic” and not subject to the Vatican guidelines, such as not performing tubal ligations.

“Those hospitals will be kept somewhat separate so they can continue to offer those services,” he says.

Baumgarten notes the odd choice of Chicago as a headquarters for CommonSpirit, “even though neither system has a presence there.”

“CHI has three small hospitals in Minnesota (Park Rapids, Breckenridge, LIttle Falls) and some nursing homes, but otherwise the combined system has only a small presence in the Midwest,” he says.

“Not sure what to say about the impact on care delivery,” Baumgarten says. “In theory, if one system has certain strengths, like better care management and discharge planning, thereby reducing the number of readmissions, it could share those strengths and practices with the other hospitals.”

“To gain efficiencies, you might see them agreeing on a single vendor for certain medical devices or commodity suppliers that all hospitals will have to use in the future,” he says. “In any of these mergers, health economists will tell you that most of the benefits could be achieved by contracts and strategic partnerships.”

CHI and Dignity announced their plans to merge in December 2017. The deal was expected to close at the end of 2018, but it was delayed for one month. No specific reason was given for the delay.

The name CommonSpirit Health was chosen in November from among more than 1,200 possible names. The health systems said they settled on that name because it represents a shared sense of missional service and because it resonates with the diverse populations being served, the organizations said.

“WE DIDN’T COMBINE OUR MINISTRIES TO GET BIGGER, WE CAME TOGETHER TO PROVIDE BETTER CARE FOR MORE PEOPLE.”

Pipeline Health, a privately held hospital ownership and management company based in Los Angeles, has acquired Arlington-based Texas Health Resources’ majority stake in 22 freestanding emergency rooms, according to The Dallas Morning News.

Pipeline Health will jointly own the freestanding ERs, which are in the Dallas-Forth Worth area, with Lewisville, Texas-based Adeptus Health. Adeptus was acquired by a hedge fund in 2017 after filing for Chapter 11 bankruptcy.

The group of freestanding ERs will be renamed City Hospital Emergency Care, and they will become outpatient ERs of City Hospital at White Rock in Dallas, which Pipeline owns.

Santa Clara County (Calif.) officials criticized California Attorney General Xavier Becerra at a press conference Jan. 24 for trying to block the county’s purchase of two bankrupt hospitals, according to The Mercury News.

In December, the bankruptcy court approved Santa Clara County’s $235 million offer to buy O’Connor Hospital in San Jose and St. Louise Regional Hospital in Gilroy from El Segundo, Calif.-based Verity Health, which entered Chapter 11 bankruptcy in August. Mr. Becerra appealed the bankruptcy court’s approval of the sale earlier this month, putting the deal in jeopardy.

Mr. Becerra is seeking to halt the sale because Santa Clara County has not agreed to conditions put in place in 2015 when private hedge fund Blue Mountain Capital acquired six hospitals owned by Los Altos, Calif.-based Daughters of Charity Health System. The deal and name change to Verity were approved, subject to several conditions.

“In this case, we have the responsibility to ensure any transfer of the hospital maintains previously imposed conditions,” Mr. Becerra’s office said in an emailed statement to The Mercury News. “The conditions include the requirement to have an emergency room, inpatient facility beds, intensive care services, and NICU. The Attorney General is fighting to ensure these conditions are enforced.”

At the Jan. 24 press conference, Santa Clara County CEO Jeff Smith, MD, said Mr. Becerra cares more about maintaining “power and control” over regulations than local residents’ access to public hospitals, according to the report.

A bankruptcy court hearing on Mr. Becerra’s request to halt the sale of the hospitals is set for Jan. 30. Dr. Smith said the outcome of the hearing could determine whether the hospitals shut down.

“If that stay is granted, that will delay the process … and it is highly likely those hospitals will close,” he said, according to The Mercury News.

O’Connor Hospital and St. Louise Regional Hospital are two of the six hospitals Verity operated when it filed for bankruptcy protection. On Jan. 18, Verity announced it had received a $610 million offer for the other four hospitals.

Dive Brief:

The size of the companies involved in healthcare M&A continues to grow. The average size in revenue of sellers was $409 million last year, nearly 14% higher than a decade ago, Kaufman Hall said in a new report.

Kaufman Hall found that seven transactions in 2018 involved sellers with net revenues of at least $1 billion.

Healthcare M&A today is more of a strategic decision than one about opportunistic growth. Fewer deals last year involved financially distressed sellers, according to the report.

Dive Insight:

Healthcare M&A isn’t so much about saving a struggling hospital now. Instead, these deals often involve strong health systems looking to expand into new areas.

Nearly one-third of healthcare transactions last year involved companies with revenues of between $100 million and $500 million. About one-fifth of deals were at least $500 million.

Nearly half involved not-for-profit companies acquiring other nonprofits and about one-quarter were not-for-profits buying for-profits. Another nearly 25% involved a for-profit acquiring either another for-profit or nonprofit.

“Health system leaders are seeking to acquire organizations that bring embedded expertise and resources to the deal, making these transactions more of a strategic partnership than an asset acquisition,” according to the report.

Kaufman Hall said it has found that health systems with “strong operational or clinical capabilities” are looking beyond their local markets.

New competitors in the market are offering larger scale and resources, including annual revenues as much as nearly 10 times the levels of the biggest not-for-profit systems. The CVS Health-Aetna deal kicked off a trend that continued with Humana-Kindred Healthcare and Optum-DaVita Medical Group and goes on with Amazon’s efforts to enter healthcare.

“New combinations across healthcare verticals and new market entrants are creating competitors that dwarf the scale of even the largest health systems,” according to the analysis. “The forces that are reshaping the industry affect not-for-profit and for-profit health systems alike and are causing not-for-profit and for-profit strategies to converge.”

Kaufman Hall found that consolidation is happening faster in some states than others. Not surprisingly, Texas led with eight deals in 2018. Florida (seven), Pennsylvania (six) and Louisiana and Tennessee (five each) ranked next.

Texas ($6.8 billion) and Florida ($3.6 billion) led in terms of revenue of announced deals. Kaufman Hall said 16 states didn’t have any healthcare transactions. However, some of those states, such as Kentucky and Massachusetts, have seen a high volume or large deals in recent years.

One downside of M&A is consolidation that can limit competition. The Center for American Progress recently reported that provider consolidation has led to higher healthcare prices. That report also found that consolidation isn’t lowering costs and improving care coordination, which is a common argument in favor of M&A activity.

Hahnemann, St. Christopher’s were recently sold by Tenet Healthcare to American Academic Health System, a newly-formed affiliate of Paladin Health.

The California healthcare firm that owns both Hahnemann University Hospital and St. Christopher’s Hospital for Children has combined leadership of the two well-known Philadelphia institutions under one new chief executive.

Paladin Healthcare created a new affiliate, American Academic Health System, to own and operate Hahnemann and St. Christopher’s. A memo sent to staff this week said that Southern California hospital executive Suzanne Richards took over as CEO for both hospitals Monday, according to the Philadelphia Inquirer.

Neither of the previous CEOs, Hahnemann interim CEO Anthony Rajkumar or St. Christopher’s leader George Rizzuto, were mentioned in the memo, the report said.

THE IMPACT

Hahnemann University Hospital is a 496-bed academic medical center affiliated with Drexel University School of Medicine. St. Christopher’s staffs more than 220 pediatric experts and offers both general pediatric care and pediatric specialties including cardiology, ear, nose and throat, gastroenterology, oncology and orthopedics, as well as one of only three Level I pediatric trauma centers in Pennsylvania and the only pediatric burn center in the Philadelphia area.

The hospital also touts an expansive primary and specialty care network that reaches into the Philadelphia suburbs and New Jersey.

THE TREND

The Inquirer report said this is one in a line of management changes American Academic has made since it acquired Hahnemann and St. Christopher’s from Tenet Healthcare in September.

In August, St. Christopher’s laid off 45 people in its physician practices and eliminated an unspecified number of positions also in its physician practices, which amounted to roughly 7 percent of the workforce in the hospital’s practices. Quoting a hospital spokesperson, the report said those being laid off were given severance or offered positions at other American Academic Health System facilities.

Paladin Healthcare formed AAHS to own and operate academic medical centers and general acute care hospitals across the country. Paladin currently manages four Southern California general acute care hospitals as well as the 145-year-old teaching hospital Howard University Hospital in Washington, DC.

Tenet netted roughly $170 million from the sale of Hahnemann and St. Christopher’s, comprised of $152.5 million in cash at closing and a promissory note in the amount of $17.5 million.

ON THE RECORD

At the time of publishing, requests for comment made to Hahnemann, St. Christopher’s and American Academic Health on the change in leadership had not been returned.

On the sale of Hahnemann and St Christopher’s to Paladin/American Academic: “Our leadership team has extensive, first-hand experience in operating hospitals in the Philadelphia market and understands the vital role Hahnemann and St. Christopher’s play in the Philadelphia healthcare delivery system,” said Barry Wolfman, president of Paladin Healthcare. “We appreciate Drexel University College of Medicine’s support and look forward to working closely with the entire physician community to continue the longstanding clinical and academic excellence of both hospitals.”

The number of hospital mergers last year dipped about 22% in 2018 but grew in overall size as part of a broader trend toward megamergers, according to a new report.

In all, hospitals announced a total of 90 transactions in 2018, down from 115 in 2017, according to a report (PDF) from Kaufman Hall. The firm began monitoring hospital M&A in 2000. About 20% of the acquisition deals were considered distressed transactions.

The value of those deals is increasing, with the average size of a seller by revenue has grown at a CAGR of almost 14% per year since 2008 and reached a new high of $409 million in 2018.

“That so many of 2018’s mega-mergers involve the combination of systems from different—though often contiguous—geographies signals the desire of health system leaders to expand their organizations into new markets, or to bring in a partner from an outside market,” Kaufman Hall said in the report. “For health system leaders looking for an acquisition partner from outside of their organization’s home market, considerations may include the desire to improve operations within the home market, or a need for additional capital to better compete within the home market.”

Texas led the nation for M&A last year, clocking eight hospital deals with a total value of deals estimated to be about $6.8 billion. Most notably, the report points to Baylor, Scott & White’s planned merger with Memorial Hermann will bring together two Texas-based systems and combine Dallas/Fort Worth and central Texas markets with the Houston market.

Florida had seven announced deals worth about $3.6 billion, and Pennsylvania had six deals worth about $2.2 billion.

Kaufman Hall also cited the “slow but steady movement toward population health” as a factor in the desire to increase market presence and penetration.

“Effective risk management depends on a health system’s ability to improve cost efficiencies, care efficacy, and care management across the continuum, which may require both horizontal and vertical integration to achieve,” they said.

Kaufman Hall said as new combinations and competitors appear in the healthcare market, hospitals and health systems should double down on their consumer strategy and the fight to control healthcare’s “front door.”

They should also seek opportunities to deepen growth across the spectrum of healthcare services through combinations or partnerships with other healthcare organizations.